2006 State Sales Tax Rates and Excise Tax Rates

February 1, 2007

We recently posted the 2006 sales tax and excise tax rates for every state in addition to our state individual income tax rate tables and corporate income tax tables posted previously.

No state increased its individual income tax rates in 2006, a sure sign that strong economic growth is keeping state coffers full. However, a few states did impose tax increases through their sales tax.

Sales tax changes

New Jersey was undoubtedly the most high-profile as a showdown between new Governor Jon Corzine and the legislature over how to close a substantial budget gap eventually shut down the state government for several days.

Governor Corzine won his battle to increase the state’s sales tax rate from 6 percent to 7 percent. Consensus was finally struck when Corzine agreed to earmark half of the increased revenue, more than $500 million, for property tax reductions.

New Jersey was not the only state to enact a sales-tax-increase-for-property-tax-decrease swap. Idaho and South Carolina both raised their rates from 5 percent to 6 percent in order to lower property taxes.

While lowering property taxes is certainly politically expedient, since politically important senior citizens complain the loudest about them, there is no economic justification for such swaps.

Politicians in other states should be wary of such swaps in the future, although there are sure to be more swap proposals due to the current uproar over property taxes.

North Carolina was the only state to decrease its sales tax in 2006. The decrease was not a true tax cut however, because it was a long overdue expiration of a temporary .5% increase in the rate that took place in October 2001 and was originally supposed to expire in June 2003. While the .25% reduction in December 2006 and the subsequent .25% decrease in July are positives for North Carolina, they came four years too late.

Excise tax changes

2006 excise taxes showed a continued reliance by lawmakers on cigarette taxes to raise revenue. Nine states-Alaska, Arizona, Hawaii, Minnesota, New Jersey, North Carolina, South Dakota, Texas and Vermont-increased their excise tax on cigarettes in 2006. Cigarette tax increases are an unreliable method of increasing revenue and create problems with evasion and border-shopping.

On the bright side, only Washington and West Virginia increased gas taxes in 2006. This was obviously because the political pressure of high gas prices kept lawmakers from increasing a tax that in previous years was a popular revenue enhancer.

Conclusion

State-level lawmakers would serve their constituents better in 2007 if they avoided financing small, gimmicky property tax relief measures by raising other taxes. Purchasers of goods subject to the general sales tax paid for many such bills during 2006, but the hardest hit were smokers. Taxing the new social pariahs – smokers – was especially popular as cigarette taxes skyrocketed.


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